Real estate investors have been stuck in purgatory, as buy and hold investments appear to have been unsuccessful in recent years. However, the recent upward trend of the market, in association with strong rental demands and soft home prices, has placed those with buy and hold properties at a significant advantage. With home prices up more than 12 percent from this time last year, individuals are entertaining the idea of house flipping once again.
“It’s a perfect storm for flipping right now in many parts of the country because home prices are bouncing off the bottom,” said Daren Blomquist, vice president at RealtyTrac. “That is something that flippers can catch on the coattails of and ride that wave as long as it lasts.”
House flipping, otherwise synonymous with the process of buying, rehabbing and selling a property within a six-month window, has been increasing in popularity. There were a total of 136,184 homes flipped in the first half of this year. That number represents a 19 percent increase from this time a year ago. By comparison, this year’s numbers are up 74 percent from the first half of 2011.
Of particular interest, however, is the increase in price ratios since 2011. Investors involved in house flipping are making much more today than ever before. Investors made an average gross profit of $18,391 per home, or a 9 percent gross return. That is up 246 percent from a year ago.
“House flipping business has keyed up quite a bit in the last 6 months,” said Steve Jones, founder of Los Angeles-based Better Shelter. With profits increasing almost exponentially, competition has been trying to catch up. “There’s not a lot of inventory, and every time a listing comes up it’s like piranha in the water,” he said.
Current conditions have enabled large-scale investors, like Blackstone, to purchase huge quantities of distressed properties and rehab them for profits as a buy and hold assets. The continued presence of investors suggests that real estate remains a very profitable practice, especially now. John Paulson, speaking at CNBC’s Delivering Alpha conference, said he is still high on housing, despite threats of a new bubble.
“It’s not too late to get involved. I still think buying a home is the best investment any individual can make. Affordability is still at an all-time high,” said Paulson.
While large investment companies have taken advantage of buy and hold opportunities, for rental purposes, they may not be responsible for the recent house flipping trend. Some experts believe that they may be the cause of it though.
“Now that the institutional investors are doing buy and hold, a lot of these guys [individual investors] can’t compete with their checkbooks,” said Rick Sharga, formerly an executive at Carrington who now works for Auction.com. “In some cases the individual investors are flipping them to the institutional investors.”
Though significant investment firms come equipped with renovation teams of their own, it is often times more profitable for them to acquire rehabbed properties from independent investors that are move-in-ready. That way, they do not need to waste time on a messy remodel that could potentially take months to complete. Flippers are of course happy, as they have someone purchasing their home at the asking price.
“So the flippers are kind of the in-between middleman who is getting the property into good rentable condition and then selling to the institutional investors,” explained Blomquist.